This mornings official release on the UK public finances has an interesting turn of events in it. So let us start with the headline number.
Public sector net borrowing (excluding public sector banks, PSNB ex) was estimated to have been £20.5 billion in August 2021; this was the second-highest August borrowing since monthly records began in 1993, but £5.5 billion less than in August 2020.
If we look at the recent trend this is disappointing. If we take out July due to it being a self-assessment month for income tax we see that May and June had also been of the order of £20 billion so the borrowing on an initial inspection looks a little stuck.
Receipts
For those of you worried about the implications of that for the underlying economy there was a fair bit of relief in the tax numbers.
Central government receipts in August 2021 were estimated to have been £61.2 billion, a £5.3 billion increase compared with August 2020. Of these receipts, tax revenue increased by £4.1 billion to £45.0 billion.
For example VAT was up by 5% on last year and PAYE income tax receipts were up by 12.8%. There was some extra self-assessment money too.
In August (and February), accrued receipts are usually boosted by late payments of self-assessed taxes due in July (and January) each year. This month, self-assessed Income Tax receipts were £2.2 billion, £0.3 billion more than in August 2020.
We need to look at the overall season and last month told us this.
This month self-assessed Income Tax receipts were £8.5 billion, £3.7 billion more than in July 2020 but £0.9 billion less than that of July 2019.
So we edged closer to the 2019 level which suggests we are nearer to it than the GDP numbers have done. Switching to Corporation Tax the numbers are not so clear but one of our themes is most definitely in play.
Corporation Tax receipts in recent months have been higher than those published in the Office for Budget Responsibility’s (OBR) Economic and fiscal outlook (EFO) – March 2021.
My first rule of OBR club that the OBR is always wrong strikes again! It is like a football team that loses 5-0 every week but comes back with the same manager and team the next season and guess what? It is long past the time to scrap it as frankly its forecasts are so consistently wrong they are misleading.
Expenditure
If it was not receipts then there is only one candidate for the source of the relatively high borrowing and here it is.
Central government bodies spent £79.6 billion in August 2021, £1.0 billion less than in August 2020.
In fact there is one area where it seems to be trying to apply a fiscal stimulus.
Central government departments spent £29.5 billion on goods and services in August 2021, an increase of £1.5 billion from August 2020.
Of course with inflation on the march some of it may be simply higher prices as we peer into the detail.
Spending in this area includes £16.5 billion on procurement and £12.7 billion in pay.
Maybe it is this.
This cost includes the expenditure by the Department of Health and Social Care (DHSC), devolved administrations and other departments in response to the coronavirus pandemic including the NHS Test and Trace programme and the cost of vaccines.
Local government expenditure is on the rise too.
Central government current transfers to local government were £9.0 billion in August 2021, an increase of £0.8 billion compared with August 2020. In part, these payments enable local authorities to fund coronavirus policies.
This is interesting because we did not get that sort of breakdown last year but we do know that in a broad sweep money was pushed to local government to help deal with the pandemic and now we seem to be spending even more.
Debt Costs
These were always going to follow the rise in the Retail Prices Index or RPI via our index-linked bonds or Gilts.
Interest payments on central government debt were £6.3 billion in August 2021, £2.9 billion more than in August 2020 but £2.3 billion less than the monthly record of £8.6 billion in June 2021.
In fact due to the lagged nature of the accounting there is worse to come.
The recent high levels in debt interest payments are largely a result of movements in the Retail Prices Index (RPI) to which index-linked gilts are pegged. To estimate the RPI uplift for 3-month lagged index linked gilts in August 2021, we reference the RPI movement between May and June 2021, with the most recent RPI not yet feeding into the estimate.
So we have monthly RPI increases of 0.7%,0.5% and 0.6% yet to feed into these numbers so the situation here comes from AC/DC.
No stop signs
Speed limit
Nobody’s gonna slow me down
Like a wheel
Gonna spin it
Nobody’s gonna mess me around
Also there is a smaller issue from conventional bonds where the ten-year yield is now around 0.8% whereas it spent nearly all of August being below 0.6%. So a drip drip from this if these yields persist.
Last Year was worse than we thought
In itself this seems fair enough.
Of these, the most notable revision to public sector net borrowing was a result of the recording of the expected loss under the government loan guarantee schemes.
The amount is pretty large and let us hope it is accurate.
We have provisionally estimated that this expenditure at inception has contributed to an increase in public sector net borrowing of £20.9 billion in financial year ending (FYE) 2021 and £0.5 billion in FYE 2022.
Debt redefined
Here are the headlines.
Public sector net debt (excluding public sector banks, PSND ex) stood at £2,202.9 billion at the end of August 2021, an increase of £184.2 billion compared with the same point last year…….Debt is now a ratio of GDP currently standing at 97.6% at the end of August 2021.
So as you can see it is even more important that bond yields are low because whilst we just noted a nudge higher it is still very cheap on three levels. Firstly in absolute terms, next relative to inflation and thirdly relative to the scale of borrowing.
The Bank of England has intervened on a large scale in this area but the effect so far has been to reduce costs but we account for it in a rather odd fashion as debt is effectively lower rather than higher.
If we were to remove the temporary debt impact of these schemes along with the other transactions relating to the normal operations of the BoE, public sector net debt excluding public sector banks (PSND ex) at the end of August 2021 would reduce by £236.3 billion (or 10.5 percentage points of GDP) to £1,966.6 billion (or 87.1% of GDP).
There are issues with this such as replacing a fixed interest-rate with a variable Bank Rate but for now with it at 0.1% that is not high. Also should it become material I expect a change in the rules.
Comment
The monthly numbers tell us that the economy looked to be doing okay in August via the tax receipts. Also that there was some fiscal stimulus via the expenditure numbers. So after the GDP growth disappointment in July we can hope for a better number in August.
Switching to the year so far we have made some solid progress on the borrowing front.
The public sector borrowed £93.8 billion in the financial year-to-August 2021, £88.9 billion less than in the same period a year earlier.
Today marked a change for our debt as we issue the first so-called green bond.
Since I wrote this, final order book for UK’s first green gilt now over £100 billion / $137 billion ( David Milliken )
It is the fashion of the times of course so investors will be keen and no doubt the Bank of England is counting down the 169 hours before it too can join the party,
The catch is where it going as there has been so much waste such as the shambles and indeed lies around Smart Meters for example.
Proceeds from the sale will be ring-fenced for projects such as clean energy, and will also help the government burnish its green credentials before it hosts the United Nations COP26 climate conference in Glasgow in November.
Let us hope that we will not in this instance be referring to Arcade Fire.
If I could have it back
All the time that we wasted
I’d only waste it again
If I could have it back
You know I would love to waste it again
Waste it again and again and again